Marking time ahead of the Fed

NEW YORK (CBS.MW) -- U.S. stocks are expected to remain range-bound this week, with only a handful of economic releases and corporate earnings reports to distract investors as they wait for the Federal Reserve a week later.

Investors will keep an eye on developments in the Middle East as the deadline for the handover of power to Iraq approaches. The crude price, which rose after recent attacks on Iraq's pipelines, will also remain in focus.

But overall, activity is expected to remain subdued until the Federal Reserve's policy-making committee announces its decision on interest rates June 30.

Investors are widely expecting the Fed to bump up rates by 25 basis points and may react nervously if a more aggressive move is announced, according to economists and strategists.

"I think a lot of the professionals are out of the arena for the time being and I think there's really no reason to get aggressive in any direction," said Michael Metz, chief investment strategist at Oppenheimer & Co.

Metz is expecting the market to remain flat through the week, "with a little erosive tone to it."

The market finished last week little changed although inflation concerns caused some volatility following the release of consumer and producer price data on Tuesday and Thursday.

The Dow Jones Industrial Average
$INDU
ended just 6 points higher on the week.

Corporate news

On the earnings front, investors will be watching second-quarter earnings reports from Morgan Stanley
MWD
and Goldman Sachs
GS
which are expected to reflect the same positive trends as seen in this week's offerings from Bear Stearns
BSC
and Lehman Brothers
LEH

Analysts are expecting Goldman on Tuesday to report earnings of $1.94 a share, up from $1.36 a year ago. Morgan is expected the same day to report earnings of $1.06, up from 55 cents a year ago.

Goldman could surprise on proprietary trading, as the firm is known on Wall Street for placing large, aggressive bets with its own money when it eyes an opportunity.

At Morgan Stanley, results from the firm's energy trading arm will be in focus, on expectations it should have profited from soaring energy prices during the quarter.

Among the other big companies reporting, Fedex
FDX
is expected Wednesday to report earnings of $1.29 a share, up from 92 cents a year ago. Retailer Bed, Bath & Beyond
BBBY
is expected to earn 25 cents a share, up from 19 cents.

"We're also in confessional season so investors will be watching for companies that may issue below forecast guidance next week," said Michael Sheldon chief market strategist at Spencer Clarke.

Analysts are expecting the second-quarter earnings season to be strong, reflecting the strengthening economy, rising industrial production and a pickup in the labor market.

"We maintain the equity markets have started a sustained H2/2004 recovery to be driven by quality-oriented earnings expansion," said Subodh Kumar at CIBC. "We see 5 percent yield as a neutral benchmark for 10-year Treasurys, which should sustain S&P 500 P/E ratios in the 18x-20x range."

Thomson First Call earnings research is looking for a strong gain in second-quarter earnings, with forecasts revised upward to 26 percent growth. See full story.

A thin spread

The economic calendar is thin next week with no data due out until Thursday, when May durable goods orders and June new home sales are slated for release.

Economists polled by CBS MarketWatch are forecasting a 1 percent rise in durable goods, after a 3.2 percent decline in April.

"Four consecutive monthly increases in manufacturing employment imply that businesses are becoming far more confident in the strength and durability of the expansion," said Bank of America economists.

New home sales are forecast at 1.13 million after 1.09 million in May. Existing home sales, due for release on Friday, are expected to come in at 6.46 million after 6.64 million in April.

Recent increases in mortgage rates and declines in mortgage loan applications would suggest that the two figures will begin to show a slowdown, but support is still coming from "fence-sitters" who are moving now that rates seem to have bottomed, said Bank of America.

"Furthermore, the pickup in payrolls and personal income is providing support to the housing market," said economists.

Economists are expecting a final first-quarter GDP reading of 4.8 percent, up from an initial reading of 4.4 percent.

Friday's action

U.S. stocks ended modestly higher Friday in a lackluster week for equities, with investors preferring to tread water until a clearer picture on interest rates emerges at the Federal Reserve meeting on June 30.

Still, triple-witching --the simultaneous expiration of futures, stock and index options -- breathed some life into the market, lifting volumes in what had otherwise been a very quiet trading week.

The Dow Jones Industrial Average
$INDU
ended up 38.89 points, or 0.4 percent, at 10,416.41.

Michael Sheldon, chief market strategist at Spencer Clarke, said uncertainty on a number of fronts, including the pace of Fed rate increases, whether or not inflation becomes a factor and what will happen when the changeover in Iraq takes place have put a malaise in the market but he's not discouraged.

"If we can get out of the month of June without any major terror events and move past the first Fed rate hike June 30, the market stands a decent chance of experiencing a summer rally in the weeks ahead," Sheldon said.

"Volume is the weapon of the bulls so if the market is going to try and break out and move higher we'll really need to see volume pick up to confirm strength in the market."

About 1.5 billion shares traded on the New York Stock Exchange while 1.7 billion shares moved on the Nasdaq. Advancers led decliners by 18-14 on the Big Board while fallers had a 16 to 14 edge over gainers.

The beheading of kidnapped American Paul Johnson in Saudi Arabia left investors feeling more cautious going into the weekend, said market professionals

"The news of the hostage beheading is psychologically depressing," said Barry Hyman, equity market strategist at Erhrenkrantz King Nussbaum. "Once that came out it looks like the wind just came out of everyone's desire to want to play today."

"Even though it is not a market moving event, it certainly on a Friday afternoon leaves a bad taste going into a weekend."

Oil, gold, currencies, bonds

July crude futures ended up 29 cents at $38.75, after reaching an earlier high of $38.83 on the New York Mercantile Exchange. Continued violence in the Middle East and an oil workers strike in Norway outweighed the bearish U.S. supply data and the news that Iraqi exports would resume late next week. See Futures Movers.

Also on NYMEX, gold for August delivery closed up $6.20 at $395.70 an ounce. See Metals Stocks.

The dollar fell after the Commerce Department said the U.S. current account deficit widened in the fourth quarter to a record $144.9 billion. Economists had expected the current account deficit to expand to $139.5 billion in the quarter from a revised $127 billion in the third quarter, according to a survey conducted by CBS MarketWatch. See Economic Report.

The U.S. dollar was down 0.7 percent vs. the euro with Europe's share currency quoted at $1.2129 and off 0.7 percent against its Japanese counterpart at 108.74 yen. See Currencies.

U.S. Treasury prices edged lower as the fixed-income market finished another week devoted largely to anticipating what would be the Federal Reserve's first interest-rate hike in four years.

The benchmark 10-year note was down 6/32 higher at 100 10/32, with its yield at 4.71 percent. See Bond Report.

Stocks in focus

On the Dow, Alcoa
AA
was the biggest percentage gainer, surging 3.9 percent to $32.53.

Goldman Sachs issued a bullish comment on the aluminum giant
AA
Friday, saying it expected second quarter operating earnings to come in above expectations and shifted its "preferred exposure" during the earnings season to Alcoa from Canada's Alcan
AL

Alcan shares shrugged off the note as investors bought the stock on strengthening aluminum prices.

Other big gainers on the Dow included DuPont
DD
3M
MMM
Microsoft
MSFT
and Honeywell
HON

Johnson & Johnson
JNJ
Hewlett-Packard
HPQ
Home Depot
HD
and Caterpillar
CAT
were among the blue chips trading in the red.

Electronic equipment manufacturers were getting a boost after a difficult day Thursday.

Solectron
SLR
jumped 12.6 percent to $5.72 after it posted better-than-expected third-quarter results and issued a fourth-quarter outlook that surpassed analysts' expectations. The stock was upgraded by Credit Suisse First Boston and Robert W. Baird. See full story.

Jabil, which was upgraded at Raymond James after the pullback, was little changed but others in the group recovered after falling Thursday: Celestica
CLS
lifted 3.7 percent and Sanmina
SANM
rose 1.1 percent.

In the chip space, the Semiconductor Equipment and Materials International book-to-bill report released late Thursday indicated demand is waning. Schwab SoundView, however, said it believes chip equipment companies "remain on track to meet June quarter order guidance of up 5 to 10 percent quarter-over-quarter."

Motorola
MOT
was off 4.1 percent after Morgan Stanley downgraded it to "equal weight" from "overweight." Morgan Stanley said first quarter margin performance, particularly in handsets, will be difficult to sustain given an intensified competitive environment.

Elsewhere in technology, shares of Red Hat
RHAT
fell 10 percent to $20.10 after the Linux software company edged past Wall Street profit expectations for its first quarter but fell short of analysts' revenue estimates. See full story.

Turbulence in the airline sector

United Airlines
UALAQ
slumped 15 percent after it lost its bid for $1.6 billion in loan guarantees late Thursday -- the second time that the federal Air Transportation Stabilization Board has turned down the bankrupt carrier. UBS said it views the rejection as a positive for both the company and the industry. See full story.

Delta Air Lines
DAL
meanwhile, lifted 6.3 percent, after its pilots union indicated it is prepared to resume wage talks with management, raising hopes it will offer new concession

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